When the monthly salary comes into your bank account, it feels like a reward, but then comes the part where you start wondering, “How much tax will I have to pay?” Such kinds of questions are always concerning, especially for salaried individuals who often find tax calculations confusing.
But, should you go for the old tax regime with various exemptions and deductions?
Or pick the new tax regime which has much lower tax slabs? If you’re confused about how to calculate your taxable income, don’t worry. This blog will walk you through steps to calculate taxed income under both regimes.
What are the two tax regimes?
The Indian income tax system now offers two ways to pay taxes- the old tax regime and the new tax regime. If you clearly understand the difference, it will help you understand how to calculate taxed income.
Old tax regime
The old tax regime is a traditional system where taxpayers can claim various exemptions and deductions to lower their income for tax. If you’re someone who invests in tax-saving instruments or pays expenses like rent and health insurance premiums, this regime is worth a closer look. And there’s a standard deduction of ₹50,000 available to all salaried employees, no matter their income level.
New tax regime
The new tax regime offers a much simpler approach to taxation. It comes with lower slab rates and fewer complications. It includes a standard deduction of ₹75,000 ( from FY 2024-25) for salaried employees and pensioners, which automatically reduces your taxable salary without requiring any proof.
In FY 2025-26, those earning up to ₹12 lakh in taxable income, before accounting for the standard deduction, will not owe any income tax. This is due to a revised rebate under Section 87A, now offering up to ₹60,000.
From FY 2023-24, the new tax regime is the default option for all taxpayers. However, you can still opt for the old regime if you prefer, but you’ll need to declare this at the time of filing returns (especially if you claim deductions).
Income tax slabs for both regimes (AY 2026-27)
Tax rates for Individual less than 60 years of age are as under:
| Old Tax Regime | New Tax Regime (u/s 115BAC) | ||
| Income Tax Slab | Income Tax Rate | Income Tax Slab | Income Tax Rate |
| Up to ₹2,50,000 | Nil | 0 to ₹4,00,000 | Nil |
| ₹2,50,001 – ₹5,00,000 | 5% | ₹4,00,001 – ₹8,00,000 | 5% |
| ₹5,00,001 – ₹10,00,000 | 20% | ₹8,00,001 – ₹12,00,000 | 10% |
| ₹10,00,001 – ₹50,00,000 | 30% | ₹12,00,001 – ₹16,00,000 | 15% |
| ₹50,00,001 – ₹100,00,000 | 30% | ₹16,00,001 – ₹20,00,000 | 20% |
| ₹100,00,001 – ₹200,00,000 | 30% | ₹20,00,001 – ₹24,00,000 | 25% |
| ₹200,00,001 – ₹500,00,000 | 30% | From ₹24,00,001 and above | 30% |
| Above ₹500,00,000 | 30% | ||
How to calculate taxable income – Step-by-step
Let’s say you earn ₹10,00,000 annually as a fixed salary. We’ll see how your taxable income and final tax payable changes under both regimes (for FY 2025-26).
Under the old tax regime
Under this regime, you are eligible for deduction claims and exemptions that can help in reducing your tax liability.
Step 1: Gross income = ₹10,00,000
Step 2: Deductions (Assumed):
- Standard Deduction = ₹50,000
- 80C (LIC (Life Insurance Corporation), PPF (Public Provident Fund), and ELSS (Equity Linked Savings Scheme) ) = ₹1,50,000
- 80D (Health Insurance) = ₹25,000
Adding everything up,
Total Deductions = ₹2,25,000
Step 3: Taxable income = ₹10,00,000 – ₹2,25,000 = ₹7,75,000
Step 4: Tax calculation:
- ₹0–₹2.5L = 0%
- ₹2.5L–₹5L = 5% of ₹2.5L = ₹12,500
- ₹5L–₹7.75L = 20% of ₹2.75L = ₹55,000
Tax = ₹67,500 + 4% cess = ₹70,200
Final Tax Payable = ₹70,200
Under the new tax regime
Under the new regime, the taxable income is calculated without most exemptions or deductions, making it a straightforward figure.
Step 1: Taking gross I=income = ₹10,00,000
Step 2: Standard deduction = ₹75,000
Taxable Income = ₹10,00,000 – ₹75,000 = ₹9,25,000
The tax amount calculated on ₹9,25,000:
Total tax payable = ₹32,500
After applying tax rebate u/s 87A
Final tax payable = ₹0
Therefore, you pay zero tax on ₹10 lakh salary under the new tax regime in FY 2025–26.
| Particulars | Old tax regime (FY 2025–26) | New tax regime (FY 2025–26) |
| Gross annual salary | ₹10,00,000 | ₹10,00,000 |
| Standard deduction | ₹50,000 | ₹75,000 |
| Other deductions (80C, 80D, etc.) | ₹1,75,000 (assumed) | Not applicable |
| Total deductions | (₹2,25,000) | (₹75,000) |
| Taxable income | ₹7,75,000 | ₹9,25,000 |
| Income tax (Before Cess) | ₹67,500 | ₹32,500 |
| Tax rebate (Section 87A) | – | (₹32,500) |
| Health & education Cess (4%) | ₹2,700 | ₹0 |
| Final tax payable | ₹70,200 | ₹0 |
Bottom line
Before filing your Income Tax Return (ITR), use a tax calculator to compare your total tax under both regimes. For salaried individuals, the government allows you to switch the regimes every year when needed. Hence you have the option to choose from based on your investment routine, review your finances annually and choose the smarter path based on your situation.
Now that you know how to calculate taxable salary in a simple and clear way, why stop there? Start building your financial future with confidence.
Must read: Plan, prosper, repeat: Unveiling the dos and don’ts of financial planning.
FAQs
Yes, salaried individuals have the flexibility to choose either the old or new tax regime each financial year while filing their Income Tax Return (ITR). You can compare your tax liability under both regimes annually and go with the more beneficial one. However, if you’re a person with business or professional income, switching is restricted to once in a lifetime unless you stop having business income.
No, under the new tax regime, most deductions and exemptions—including HRA, LTA, Section 80C (investments like PPF or ELSS), and Section 80D (health insurance premiums)—are not allowed. The regime is designed to simplify taxation and reduce dependency on tax-saving investments. Only a few exemptions, like employer contributions to NPS or gratuity, and the new ₹75,000 standard deduction, are permitted in this regime.
If you don’t actively invest in tax-saving instruments like LIC, PPF, or ELSS, or if you don’t pay rent (so can’t claim HRA), the new tax regime is likely more beneficial for you. It offers lower tax rates and a clean, paperless process. With the new ₹75,000 standard deduction and zero tax on income up to ₹12 lakh, it’s a great fit for salaried employees with minimal deductions.
Unfortunately, interest on home loan (Section 24b) is not allowed as a deduction under the new tax regime, even for self-occupied properties. If you’re paying a home loan and want to claim interest benefit (up to ₹2 lakh), you must choose the old tax regime. However, if you’re not claiming deductions and the new regime works out cheaper for you, it may still be worth choosing despite not using the loan benefit.
It depends. For those earning above ₹15 lakh, the new tax regime can be beneficial if they don’t claim many deductions. However, if you have significant deductions, like ₹1.5 lakh under 80C, ₹50,000 standard deduction, HRA, and more, the old regime might offer more tax savings. The higher your claimed deductions, the more likely it is that the old regime could result in a lower final tax outgo.
